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Hot stock: Eagle Hospitality Trust sinks 14% despite assurance on Queen Mary lease

STAPLED securities of Eagle Hospitality Trust (EHT) dived on Friday, despite the property trust saying its sponsor, Urban Commons (UC), is not at risk of losing its lease on a key asset in California.

The counter fell 9.3 per cent or six US cents in the morning to 58.5 US cents as at 10.12am, with 4.6 million units changing hands. It then sank further to 55.5 US cents by 3pm, down nine US cents or 14 per cent on the day with 18.6 million stapled securities traded.

Traders told The Business Times that based on the price range of EHT units during the afternoon session, the property trust has been oversold by the market.

"At its trading price of 55.5 US cents, the relative strength index (RSI) is around 11.5, which suggests EHT units are oversold," Ernest Lim, a remisier, said. The RSI is a momentum indicator used by traders to measure the speed and change of price movement to evaluate overbought or oversold conditions in the price of equities.

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On Thursday after market close, EHT said UC is not in default on the lease to run the historic Queen Mary – a retired luxury cruise liner converted into an upscale 347-room hotel – which forms part of EHT’s portfolio.

EHT was responding to media reports on Wednesday that the city of Long Beach, where Queen Mary is docked, had sent a letter claiming UC had not met its lease obligations to maintain the ship, which had fallen into disrepair. The city also gave UC until Oct 31 to respond, or else it may find the Los Angeles-based developer in default.

The letter said UC had not made several repairs, including the removal of 22 lifeboats suspended from the ship. Considered the most urgent project, the lifeboats pose "a serious threat to the ship's structural integrity and the safety of guests and employees", the letter stated.

UC is preparing a response to be “imminently” sent to the city, to address the items referenced in the letter, EHT clarified on Thursday evening.

UOB Kay Hian analysts Jonathan Koh and Nicola Ho noted that EHT has been working closely with the City of Long Beach to establish a perpetual funding mechanism to provide continued resources to safeguard the Queen Mary’s viability. This is funded by passenger fees collected from Carnival Cruise Line Terminal, where the former ocean liner is docked.

Prior to EHT's listing, US$23.5 million was spent on the Queen Mary in 2018 to repair its fire and life safety systems, replacement of expansion joints, and additional major structural repairs and renovations.

In the event that the valuation of the Queen Mary is written down to zero, the UOB Kay Hian analysts forecast that EHT's FY2020 distribution per unit would drop by 22 per cent to 5.12 US cents, while net asset value per share would fall by 21 per cent to US$0.69. This would result in its 12-month target price for the property trust dropping to US$0.80. At present, UOB Kay Hian has maintained its "buy" call and target price of US$1.02.

Meanwhile, KGI Securities has maintained its "outperform" recommendation on EHT with a reduced target price of US$0.72, after pricing in a higher market risk premium and therefore cost of equity. That target price still represents a total upside of 40.5 per cent, inclusive of the FY2020 dividend of 11.4 per cent, said KGI analyst Amirah Yusoff.

KGI also performed a worst-case scenario analysis where it removed all rental income contributions from the Queen Mary (about 15 per cent of net property income). Dividend yield is still attractive at 8.2 per cent for FY2020, with a reduced target price of US$0.56, Ms Yusoff said. "Based on current prices, we believe the market has priced in the worst case scenario, thus leaving limited downside."

"Either way, the stock is currently trading at very attractive levels, and I wouldn't be surprised if traders take the chance to enter positions on EHT by buying on today's drop," one dealer said.